CHAPTER Accounting in Action ASSIGNMENT CLASSIFICATION TABLE Brief Exercises Learning Objectives Questions Do It! Exercises Identify the activities and users associated with accounting 1, 2, 3, 4, 1, 2 Explain the building blocks of accounting: ethics, principles, and assumptions 6, 7, 8, 9, 10 3, State the accounting equation, and define its components 11, 12, 13, 22 1, 2, 3, 4, 5, Analyze the effects of business transactions on the accounting equation 14, 15, 16, 18 7, 8, 6, 7, 1, 2, 4, 5 Describe the five financial statements and how they are prepared 17, 19, 20, 21 10, 11 9, 10, 11, 12, 13, 14, 15, 16, 17, 18 2, 3, 4, Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) Problems 1-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1-2 Description Difficulty Level Time Allotted (min.) Analyze transactions and compute net income Moderate 40–50 Analyze transactions and prepare income statement, retained earnings statement, and statement of financial position Moderate 50–60 Prepare income statement, retained earnings statement, and statement of financial position Moderate 50–60 Analyze transactions and prepare financial statements Moderate 40–50 Determine financial statement amounts and prepare retained earnings statement Moderate 40–50 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) WEYGANDT FINANCIAL ACCOUNTING IFRS 4E CHAPTER ACCOUNTING IN ACTION Number LO BT Difficulty Time (min.) BE1 AP Simple 2–4 BE2 AP Simple 3–5 BE3 AP Moderate 4–6 BE4 AP Moderate 4–6 BE5 C Simple 2–4 BE6 C Simple 2–4 BE7 C Simple 2–4 BE8 C Simple 2–4 BE9 C Simple 1–2 BE10 AP Simple 3–5 BE11 C Simple 2–4 DI1 K Simple 2–4 DI2 K Simple 2–4 DI3 AP Simple 6–8 DI4 AP Moderate 8–10 DI5 AP Moderate 10–12 EX1 C Moderate 5–7 EX2 C Simple 6–8 EX3 C Moderate 6–8 EX4 C Moderate 6–8 EX5 C Simple 4–6 EX6 C Simple 6–8 EX7 C Simple 4–6 EX8 AP Moderate 12–15 EX9 AP Simple 12–15 EX10 AP Moderate 8–10 EX11 AP Moderate 6–8 EX12 AP Simple 8–10 EX13 AN Simple 8–10 EX14 AP Simple 10–12 EX15 AP Simple 6–8 EX16 AP Moderate 6–8 EX17 AP Moderate 6–8 EX18 C Simple 2–4 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 1-3 ACCOUNTING IN ACTION (Continued) Number LO BT Difficulty Time (min.) P1 3, AP Moderate 40–50 P2 4, AP Moderate 50–60 P3 AP Moderate 50–60 P4 4, AP Moderate 40–50 P5 4, AP Moderate 40–50 CT1 AN Simple 10–15 CT2 AN Simple 10–15 CT3 C Simple 15–20 CT4 E Moderate 15–20 CT5 E Simple 12–15 CT6 E Simple 10–12 CT7 - C Simple 10–15 1-4 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) Learning Objective Knowledge Comprehension Identify the activities and users DI1-1 associated with accounting Q1-1 Q1-2 Q1-3 Q1-4 Explain the building blocks of accounting: ethics, principles, and assumptions DI1-2 Q1-7 Q1-8 Q1-9 Q1-10 Q1-6 E1-3 E1-4 State the accounting equation, and define its components Q1-11 Q1-12 Q1-13 BE1-5 BE1-6 E1-5 Analyze the effects of business transactions on the accounting equation Describe the five financial statements and how they are prepared Expand Your Critical Thinking Q1-14 Q1-15 Q1-16 Q1-18 BE1-7 Q1-17 Q1-19 Q1-20 BE1-11 E1-18 Application Analysis Synthesis Evaluation Q1-5 E1-1 E1-2 BE1-8 BE1-9 E1-6 E1-7 Real–World Focus Considering People, Planet, and Profit Q1-22 BE1-1 BE1-2 BE1-3 BE1-4 DI1-3 P1-1 DI1-4 E1-8 P1-1 P1-2 P1-4 Q1-21 BE1-10 DI1-5 E1-9 E1-10 E1-11 E1-12 E1-14 E1-15 P1-5 E1-16 E1-17 P1-2 P1-3 P1-4 P1-5 E1-13 Financial Reporting Comparative Analysis Decision–Making Across the Organization Communication Activity Ethics Case All About You BLOOM’S TAXONOMY TABLE Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems 1-5 ANSWERS TO QUESTIONS 1 Yes, this is correct Virtually every organization and person in our society uses accounting information Businesses, investors, creditors, government agencies, and not-for-profit organizations must use accounting information to operate effectively 2 Accounting is the process of identifying, recording, and communicating the economic events of an organization to interested users of the information The first step of the accounting process is therefore to identify economic events that are relevant to a particular business Once identified and measured, the events are recorded to provide a history of the financial activities of the organization Recording consists of keeping a chronological diary of these measured events in an orderly and systematic manner The information is communicated through the preparation and distribution of accounting reports, the most common of which are called financial statements A vital element in the communication process is the accountant’s ability and responsibility to analyze and interpret the reported information 3 (a) Internal users are those who plan, organize, and run the business and therefore are officers and other decision makers (b) To assist management, accounting provides internal reports Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year 4 (a) Investors (owners) use accounting information to make decisions to buy, hold, or sell shares (b) Creditors use accounting information to evaluate the risks of granting credit or lending money 5 No, this is incorrect Bookkeeping usually involves only the recording of economic events and therefore is just one part of the entire accounting process Accounting, on the other hand, involves the entire process of identifying, recording, and communicating economic events 6 Jackie Remmers Travel Agency should report the land at £85,000 on its December 31, 2020 statement of financial position This is true not only at the time the land is purchased, but also over the time the land is held In determining which measurement principle to use (cost or fair value) companies weigh the factual nature of cost figures versus the relevance of fair value In general, companies use cost Only in situations where assets are actively traded companies apply the fair value principle extensively An important concept that accountants follow is the historical cost principle 7 The monetary unit assumption requires that only transaction data capable of being expressed in terms of money be included in the accounting records This assumption enables accounting to quantify (measure) economic events 8 The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities 9 The three basic forms of business organizations are: (1) proprietorship, (2) partnership, and (3) corporation 1-6 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) Questions Chapter (Continued) 10 One of the advantages Teresa Alvarez would enjoy is that ownership of a corporation is represented by transferable shares This would allow Teresa to raise money easily by selling a part of her ownership in the company Another advantage is that because holders of the shares (shareholders) enjoy limited liability, they are not personally liable for the debts of the corporate entity Also, because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life 11 The basic accounting equation is Assets = Liabilities + Equity 12 (a) Assets are resources owned by a business Liabilities are claims against assets Put more simply, liabilities are existing debts and obligations Equity is the ownership claim on total assets (b) Equity is affected by shareholders’ investments, dividends, revenues, and expenses 13 The liabilities are: (b) Accounts payable and (g) Salaries and wages payable 14 Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected An example would be a transaction where an increase in one asset is offset by a decrease in another asset An increase in the Equipment account which is offset by a decrease in the Cash account is a specific example 15 Business transactions are the economic events of the enterprise recorded by accountants because they affect the basic equation (a) No, the death of the president of the company is not a business transaction as it does not affect the basic equation (b) Yes, supplies purchased on account is a business transaction as it affects the basic equation (c) No, an employee being fired is not a business transaction as it does not affect the basic equation 16 (a) (b) (c) (d) 17 (a) Income statement (b) Statement of financial position (c) Income statement 18 No, this treatment is not proper While the transaction does involve a receipt of cash, it does not represent revenues Revenues are the gross increase in equity resulting from business activities entered into for the purpose of earning income This transaction is simply an additional investment made by one of the owners of the business 19 Yes Net income does appear on the income statement—it is the result of subtracting expenses from revenues In addition, net income appears in the retained earnings statement—it is shown as an addition to the beginning-of-period retained earnings Indirectly, the net income of a company is also included in the statement of financial position It is included in the Retained Earnings account which appears in the equity section of the statement of financial position Decrease assets and decrease equity Increase assets and decrease assets Increase assets and increase equity Decrease assets and decrease liabilities (d) Statement of financial position (e) Statement of financial position and retained earnings statement (f) Statement of financial position Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 1-7 Questions Chapter (Continued) 20 21 (a) Ending equity balance Beginning equity balance Net income £198,000 158,000 £ 40,000 (b) Ending equity balance Beginning equity balance Deduct: Investment Net income £198,000 158,000 40,000 13,000 £ 27,000 (a) Total revenues (£30,000 + £70,000) £100,000 (b) Total expenses (£26,000 + £40,000) £66,000 (c) Total revenues Total expenses Net income £100,000 66,000 £34,000 22 TSMC’s accounting equation at December 31, 2016 was NT$1,886,455,302 = NT$496,404,176 + NT$1,390,051,126 1-8 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1.1 (a) ¥88,000 – ¥50,000 = ¥38,000 (Equity) (b) ¥45,000 + ¥70,000 = ¥115,000 (Assets) (c) ¥94,000 – ¥60,000 = ¥34,000 (Liabilities) BRIEF EXERCISE 1.2 (a) £120,000 + £232,000 = £352,000 (Total assets) (b) £190,000 – £80,000 = £110,000 (Total liabilities) BRIEF EXERCISE 1.3 (a) (€800,000 + €150,000) – (€300,000 – €60,000) = €710,000 (Equity) (b) (€300,000 + €100,000) + (€800,000 – €300,000 – €70,000) = €830,000 (Assets) (c) (€800,000 – €80,000) – (€800,000 – €300,000 + €120,000) = €100,000 (Liabilities) BRIEF EXERCISE 1.4 Equity Share Assets (a) (b) Liabilities + Capital X = 90,000 + 150,000 X = 90,000 + 220,000 X = 310,000 57,000 = X + 35,000 57,000 = X + 45,000 X (c) = = – – Dividends 40,000 7,000 + Revenues – Expenses + 450,000 – 340,000 + 52,000 – 35,000 12,000 ( 57,000 – 45,000) 660,000 = ( 660,000 x 2/3) + X (Equity) 660,000 = 440,000 + X = 220,000 X – Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 1-9 BRIEF EXERCISE 1.5 A L A (a) Accounts receivable (b) Salaries and wages payable (c) Equipment A E L (d) Supplies (e) Share capital— (f) Ordinary Notes payable BRIEF EXERCISE 1.6 E R E E (a) (b) (c) (d) Advertising expense Service revenue Insurance expense Salaries and wages expense D R E (e) Dividends (f) Rent revenue (g) Utilities expense BRIEF EXERCISE 1.7 (a) (b) (c) Assets + + – Liabilities + NE NE Equity NE + – BRIEF EXERCISE 1.8 (a) (b) (c) Assets + – NE Liabilities NE NE NE Equity + – NE BRIEF EXERCISE 1.9 R NE E 1-10 (a) Received cash for services performed (b) Paid cash to purchase equipment (c) Paid employee salaries Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) PROBLEM 1.4 (Continued) Key to Retained Earnings Column (a) Rent expense (b) Service revenue (c) Dividends (d) Gasoline expense (b) (e) (f) (g) Service revenue Utilities expense Salaries and wages expense STINER DELIVERIES LTD Income Statement For the Month Ended June 30, 2020 Revenues Service revenue (£4,800 + £1,500) Expenses Salaries and wages expense £1,000 Rent expense 500 Utilities expense 250 Gasoline expense 100 Total expenses Net income (c) £6,300 1,850 £4,450 STINER DELIVERIES LTD Statement of Financial Position June 30, 2020 Assets Equipment Supplies Accounts receivable Cash Total assets £14,000 150 3,550 8,100 £25,800 Equity and Liabilities Equity Share capital—ordinary £10,000 Retained earnings (£4,450 – £300) 4,150 Total equity Liabilities Notes payable 11,500 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) £14,150 1-35 Accounts payable 150 Total liabilities Total equity and liabilities 1-36 11,650 £25,800 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) PROBLEM 1.5 (a) (b) Crosby Stills Nash Young Company Company Company Company (a) HK$250,000 (d) HK$600,000 (g) HK$1,200,000 (j) HK$ 500,000 (b) 950,000 (e) 620,000 (h) 700,000 (k) 2,200,000 (c) 50,000 (f) 380,000 (i) 4,310,000 (l) 4,650,000 STILLS COMPANY Retained Earnings Statement For the Year Ended December 31, 2020 Retained earnings, January Add: Net income Less: Dividends Retained earnings, December 31 HK$200,000 350,000 550,000 380,000 HK$170,000 (c) The sequence of preparing financial statements is income statement, retained earnings statement, and statement of financial position The interrelationship of the retained earnings statement to the other financial statements results from the fact that net income from the income statement is reported in the retained earnings statement and ending retained earnings reported in the retained earnings statement is the amount reported for retained earnings on the statement of financial position Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 1-37 CT 1.1 FINANCIAL REPORTING PROBLEM (a) TSMC’s total assets at December 31, 2016 were NT$ 1,886,455,302 and at December 31, 2015 were NT$ 1,657,518,298 (b) TSMC had NT$ 541,253,833 of cash and cash equivalents at December 31, 2016 (c) TSMC had accounts payable totaling NT$ 26,062,351 on December 31, 2016 and NT$ 18,575,286 on December 31, 2015 (d) TSMC reports revenues for 2016 of NT$ 947,938,344 and for 2015 of NT$ 843,497,368 million (e) From 2015 to 2016, TSMC’s net income increased NT$ 27,782,069 from NT$ 306,556,167 to NT$ 334,338,236 1-38 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) CT 1.2 COMPARATIVE ANALYSIS PROBLEM (a) Total assets Accounts (trade) receivable (net) Net sales Net income (profit) (b) Receivables as a percentage of total assets Net income as a percentage of sales (revenue) Nestlé (in millions) CHF 131,901 CHF 12,411 Delfi Limited (in thousands) US$342,331 US$ 61,756 CHF 89,469 CHF 8,883 US$402,083 US$ 26,153 Nestlé 9.41% Delfi Limited 18.04% 9.93% Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 6.50% 1-39 CT 1.3 REAL–WORLD FOCUS (a) The skills required in these areas: People skills, sales skills, communication skills, analytical skills, ability to synthesize, creative ability, initiative, computer skills (b) The skills required in these areas differ as follows: People skills Sales skills Communication skills Analytical skills Ability to synthesize Creative ability Initiative Computer skills 1-40 Auditing Medium Medium Medium High Medium Low Medium High Financial and Tax Medium Medium Medium Very High Low Medium Medium High Management Accounting Medium Low High High High Medium Medium Very High Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) CT 1.4 DECISION–MAKING ACROSS THE ORGANIZATION (a) The estimate of the £6,100 loss was based on the difference between the £25,000 invested in the driving range and the bank balance of £18,900 at March 31 This is not a valid basis for determining income because it only shows the change in cash between two points in time (b) The statement of financial position at March 31 is as follows: CHIP-SHOT DRIVING RANGE, LTD Statement of Financial Position March 31, 2020 Assets Building Equipment Cash Total assets £ 8,000 800 18,900 £27,700 Equity and Liabilities Equity Share capital-ordinary £25,000 Retained earnings 2,480 Liabilities Accounts payable (£120 + £100) Total equity and liabilities £27,480 220 £27,700 As shown in the statement of financial position, the equity at March 31 is £27,480 The estimate of £2,480 of net income is the difference between the initial investment of £25,000 and £27,480 This was not a valid basis for determining net income because changes in equity between two points in time may have been caused by factors unrelated to net income For example, there may be dividends and/or additional investments by the owner Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 1-41 CT 1.4 (Continued) (c) Actual net income for March can be determined by adding dividends to the change in equity during the month as shown below: Equity, March 31, per statement of financial position Equity, March Increase in equity Add: Dividends Net income £27,480 (25,000) 2,480 1,000 £ 3,480 Alternatively, net income can be found by determining the revenues earned [described in (d) below] and subtracting expenses (d) Revenues earned can be determined by adding expenses incurred during the month to net income March expenses were Rent, £1,000; Salaries and Wages, £500; Advertising, £750; and Utilities, £120 for a total of £2,370 Revenues earned, therefore, were £5,850 (£2,370 + £3,480) Alternatively, since all revenues are received in cash, revenues earned can be computed from an analysis of the changes in cash as follows: Beginning cash balance Less: Cash payments Caddy shack Golf balls and clubs Rent Advertising Salaries and wages Dividends Cash balance before revenues Cash balance, March 31 Revenues earned 1-42 £25,000 £8,000 800 1,000 650 500 1,000 11,950 13,050 18,900 £ 5,850 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 1-43 CT 1.5 To: From: COMMUNICATION ACTIVITY Erin Danielle Student I have received the statement of financial position of Liverpool Ltd as of December 31, 2020 A number of items in this statement of financial position are not properly reported They are: The statement of financial position should be dated as of a specific date, not for a period of time Therefore, it should be dated “December 31, 2020.” Cash should be reported after Supplies on the statement of financial position Accounts receivable should be shown as an asset, not a liability, and reported between Cash and Supplies on the statement of financial position Accounts payable should be shown as a liability, not an asset The note payable is also a liability and should be reported in the liability section Liabilities and equity should be shown on the statement of financial position Share capital—ordinary is not a liability Share capital—ordinary and retained earnings are part of equity 1-44 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) CT 1.5 (Continued) A correct statement of financial position is as follows: LIVERPOOL LTD Statement of Financial Position December 31, 2020 Assets Equipment Supplies Accounts receivable Cash Total assets £25,500 3,000 5,000 9,000 £42,500 Equity and Liabilities Equity Share capital—ordinary Retained earnings Total liabilities Liabilities Notes payable Accounts payable Total liabilities Total equity and liabilities £26,000 (2,000) £24,000 10,500 8,000 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 18,500 £42,500 1-45 CT 1.6 (a) ALL ABOUT YOU Answers to the following will vary depending on students’ opinions (1) This does not represent the hiding of assets, but rather a choice as to the order of use of assets This would seem to be ethical (2) This does not represent the hiding of assets, but rather is a change in the nature of assets Since the expenditure was necessary, although perhaps accelerated, it would seem to be ethical (3) This represents an intentional attempt to deceive the financial aid office It would therefore appear to be both unethical and potentially illegal (4) This is a difficult issue By taking the leave, actual net income would be reduced The form asks the applicant to report actual net income However, it is potentially deceptive since you not intend on taking unpaid absences in the future, thus future income would be higher than reported income (b) Companies might want to overstate net income in order to potentially increase the stock price by improving investors’ perceptions of the company Also, a higher net income would make it easier to receive debt financing Finally, managers would want a higher net income to increase the size of their bonuses (c) Sometimes companies want to report a lower income if they are negotiating with employees For example, professional sports teams frequently argue that they can not increase salaries because they aren’t making enough money This also occurs in negotiations with unions For tax accounting (as opposed to the financial accounting in this course) companies frequently try to minimize the amount of reported taxable income (d) Unfortunately many times people who are otherwise very ethical will make unethical decisions regarding financial reporting They might be driven to this because of greed Frequently it is because their superiors have put pressure on them to take an unethical action, and they are afraid to not follow directions because they might lose their job Also, in some instances top managers will tell subordinates that they should be a team player, and the action because it would help the company, and therefore would help fellow employees 1-46 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) CT 1.7 CONSIDERING PEOPLE, PLANET, AND PROFIT The aspirations of the company are related to sustaining (1) its business, (2) its brands, (3) its people, (4) its communities, and (5) the planet Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 1-47 GAAP EXERCISES GAAP 1-1 The International Accounting Standards Board, IASB, and the Financial Accounting Standards Board, FASB, are two key players in developing international accounting standards The IASB releases international standards known as International Financial Reporting Standards (IFRS) The FASB releases U.S standards, referred to a Generally Accepted Accounting Principles or GAAP GAAP 1-2 Accounting standards have developed in different ways because the standard setters have responded to different user needs In some countries, the primary users of financial statements are private investors; in others the primary users are taxing authorities or central government planners GAAP 1-3 A single set of high-quality accounting standards is needed because of increases in multinational corporations, mergers and acquisitions, use of information technology, and international financial markets GAAP 1-4 Currently the internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S exchanges If such standards were adopted by non-U.S companies, users of statements would benefit from more uniform regulation and U.S companies would be competing on a more “even” playing field The disadvantage of adopting SOX would be the additional cost associated with its required internal control measures 1-48 Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) GAAP 1.5 GAAP FINANCIAL REPORTING PROBLEM (a) Apple’s total assets at September 24, 2016 were $321,686 million and at September 26, 2015 were $290,345 million (b) Apple had $20,484 million of cash and cash equivalents at September 24, 2016 (c) Apple had accounts payable totaling $37,294 million on September 24, 2016 and $35,490 million on September 26, 2015 (d) Apple reports net sales for three consecutive years as follows: 2014 2015 2016 $182,795 million $233,715 million $215,639 million (e) From 2015 to 2016, Apple’s net income decreased $7,707 million from $53,394 million to $45,687 million Copyright © 2019 WILEY Weygandt Financial Accounting, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 1-49